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Amnesty Payments, Penalties and Interest - June 1, 2005

Amnesty FAQs

Payments

  1. Does the 15-day grace period apply to the last installment payment?

Amnesty Penalty

  1. Can I get a refund of the Amnesty Penalty if I did not choose amnesty, and I pay the tax and the amnesty penalty, I later file a refund claim for the associated tax, and the refund claim is allowed?
  2. Is the Amnesty Penalty an unconstitutional retroactive penalty?
  3. If a taxpayer has an overpayment for one year and a smaller underpayment for another year (i.e., a net overpayment), would FTB assess the 50% penalty under section 19777.5 for the year of the underpayment?
  4. What does "due and payable" mean in section 19777.5(a)(2)? Can a taxpayer eliminate the amnesty penalty by paying a proposed deficiency before it becomes final or a self-assessed amount before a bill is sent?

Accuracy Related Penalty

  1. What are the changes to the Accuracy Related Penalty under Revenue and Taxation Code section 19164?
  2. When does the increased Accuracy Related Penalty not apply?
  3. What is the effective date of the increased Accuracy Related Penalty?
  4. If I am under an ongoing audit at the start of the amnesty period, will the increased Accuracy Related Penalty apply to assessment notices issued after March 31, 2005?

Miscellaneous

  1. What penalties or fees can be waived under Amnesty?
  2. Can I claim a refund of amounts paid under the amnesty program?
  3. What taxpayers and/or amounts are not subject to the amnesty penalty under Revenue and Taxation Code section 19777.5?

PAYMENTS

1. Does the 15-day grace period apply to the last installment payment?

No. Under Revenue and Taxation Code section 19733(b)(1), amounts due under the amnesty installment agreement must be paid no later than June 30, 2006. Section 19733(a)(4) provides that if the Franchise Tax Board mails a notice of balance due to a taxpayer "resulting from the filing of an amnesty application", and the taxpayer pays the balance due within 15 days, then the payment is treated as paid during the amnesty period. A notice of balance due on an installment agreement is not a notice "resulting from the amnesty application."

AMNESTY PENALTY

2. Can I get a refund of the Amnesty Penalty if I did not choose amnesty, and I pay the tax and the amnesty penalty, I later file a refund claim for the associated tax, and the refund claim is allowed?

Yes. The amnesty penalty is computed by reference to the underpayment interest due (Revenue and Taxation Code section 19775.5(a)(1)) or computed (Revenue and Taxation Code section 19777.5 (a)(2)) from the original due date of the return to March 31, 2005. If that amount changes due to a redetermination of the correct tax liability for the year, the penalty will necessarily be recomputed to reflect the change. The phrase "in connection with the penalty imposed in subdivision (a)" in section 19777.5(e) limits refund claims to amounts paid in excess of the proper amount of penalty computed under section 19777.5(a). No refund claims are allowed for amounts properly computed in accordance with section 19777.5(a). In other words, a taxpayer can claim a refund of amounts paid in excess of the properly computed penalty, but cannot claim a refund of the penalty itself.

3. Is the Amnesty Penalty an unconstitutional retroactive penalty?

No. The Amnesty Penalty is not retroactive. It is imposed prospectively in an amount equal to interest from the original due date of the return. Taxpayers have an opportunity to avoid the penalty by paying all amounts due for amnesty years before March 31, 2005. See United States v. Carlton (1994) 512 U.S. 26.

4. If a taxpayer has an overpayment for one year and a smaller underpayment for another year (i.e., a net overpayment), would FTB assess the 50% penalty under section 19777.5 for the year of the underpayment?

A statutory exception was created by AB 911 (stats. 2005, Ch. 398.). For purposes of computing the post-amnesty penalty (Revenue and Taxation Code section 19777.5(a)(2) only), where one of the interest netting provisions in the Revenue and Taxation Code applies to reduce the underpayment interest amount due on a tax year because of the application of an overpayment from a different tax year or a related taxpayer, the penalty is calculated only on the net underpayment interest remaining after the application of the overpayment.

5. What does "due and payable" mean in section 19777.5(a)(2)? Can a taxpayer eliminate the amnesty penalty by paying a proposed deficiency before it becomes final or a self-assessed amount before a bill is sent?

The phrase "due and payable" is not a condition for assessing a penalty, but an indication of the time that the penalty is computed. In this context, it means "assessed."
As opposed to the penalties imposed by section 19777.5(a)(1) which arise on final balances due as of March 31, 2005, where an amount is not yet final as of March 31, 2005, the penalty under section 19777.5(a)(2) will be assessed when additional tax amounts are determined and assessed to the taxpayer's account. Any payments made before March 31, 2005, are first applied, and then the penalty is computed on the remaining balance. Finally, payments made after March 31, 2005, are applied, and any remaining balance is billed. Section 19777.5(a)(2) specifically applies to deficiencies that become final after the amnesty period and to self-assessed amounts assessed after the amnesty period. These amounts become "due and payable" when they are final and assessed to the taxpayer's account. (See Appeal of Michael and Sonia Kishner, 99-SBE-007, September 29, 1999 [deficiency assessments]; Schatz v. FTB (1999) 69 Cal. App 4th 595 [self-assessed amounts].)

ACCURACY RELATED PENALTY

6. What are the changes to the Accuracy Related Penalty under Revenue and Taxation Code section 19164?

The new law provides for an increase to the existing accuracy related penalty for an amnesty-eligible tax year from twenty (20) percent to forty (40) percent, for any proposed assessment issued after the end of the amnesty period (March 31, 2005).

7. When does the increased Accuracy Related Penalty not apply?

The increased penalty does not apply to understatements related to tax shelter items. The increased penalty also does not apply to any understatement that is the subject of an audit, protest, appeal, settlement or litigation as of the start of the amnesty period. (Revenue and Taxation Code section 19164(a)(1)(B)(i) and (ii).)

8. What is the effective date of the increased Accuracy Related Penalty?

This penalty applies to taxable years 2002 and earlier, and only to notices of proposed assessment issued after March 31, 2005.

9. If I am under an ongoing audit at the start of the amnesty period, will the increased Accuracy Related Penalty apply to assessment notices issued after March 31, 2005?

No. If you are under audit for a tax year at the beginning of the amnesty period, any Accuracy Related penalty that might be assessed for that tax year will be at the 20 percent rate instead of the new 40 percent rate.

MISCELLANEOUS

10. What penalties or fees can be waived under Amnesty?

Under Revenue and Taxation Code section 19732, the penalty or fee must be due to the previous underreporting or underpayment of tax liabilities or prior nonpayment of any taxes previously assessed or proposed to be assessed for that taxable year. Also, the penalty or fee must be imposed under Part 10.2 of the Revenue and Taxation Code. See penalties and fees that can be waived by amnesty for Individuals or Business entities.

11. Can I claim a refund of amounts paid under the amnesty program?

No. Any amount paid in connection with the tax amnesty program may not be refunded. (See Revenue and Taxation Code section 19732(e).) The term "in connection with" in this context means "paid or applied to" the amount required to be paid for the full payment requirement of amnesty to be satisfied under Revenue and Taxation Code section 19733(a)(3)(B).

12. What taxpayers and/or amounts are not subject to the amnesty penalty under Revenue and Taxation Code section 19777.5?

The amnesty penalty is imposed on amounts "for which amnesty could have been requested." (RTC section 19777.5(a).) Section 19732(b) expressly precludes from participation in the amnesty program those taxpayers that are under criminal investigation, on notice of a criminal investigation as a result of a criminal complaint being filed, or for which a criminal court proceeding has been initiated.

Section 19732(c) provides that the amnesty program is not available for any nonreported or underreported tax liability amounts attributable to tax shelter items that could have been reported under either the voluntary compliance initiative under Chapter 9.5 or the Internal Revenue Service's Offshore Voluntary Compliance Initiative described in Revenue Procedure 2003-11.

As a result of the above exclusions, those taxpayers precluded from participating in amnesty under section 19732(b) are not subject to the amnesty penalty under section 19777.5. With respect to those taxpayers with tax liability amounts not eligible for amnesty under section 19732(c), the amnesty penalty under section 19777.5 will not apply to those amounts described in section 19732(c), but would apply to other tax liability amounts of the same taxpayer, without regard to whether the other tax liability amounts arise within the same taxable year, or a different taxable year, as the amounts ineligible for amnesty under section 19732(c).

Finally, section 19738 excludes from the amnesty penalty under section 19777.5 any amounts covered by an installment payment agreement between individuals or fiduciaries and the Franchise Tax Board that exists as of February 1, 2005.